The effect of health on acute care supplemental insurance ownership: An empirical analysis

The empirical effect of health status on private insurance ownership is a m ixture of the effect of health on the demand for insurance (subjected to ad verse selection) and its effect on the insurer's underwriting practice (sub jected to risk-selection). Using bivariate partial observability probit mod els, this paper provides an empirical identification of health effects on t he probability of application and on the probability of rejection in the Is raeli market for acute care supplemental health insurance. The analysis sho ws that while the reduced-form health effect on ownership is negligible, th e structural effects are sizeable and indicate that sicker individuals are more likely to apply, but are also more likely to be rejected. The policy i mplications of the above findings are discussed in the context of the Israe li health system. Copyright (C) 2001 John Wiley & Sons, Ltd.